Image source: Britvic (copyright Evan Doherty)
As a shareholder in JD Sports (LSE: JD), I like the long-term investment case for the retailer. One quick look at the JD Sports’ share price however, and it becomes obvious that not everybody shares my enthusiasm.
It’s down by 33% over the past year alone. On a five-year timeframe, the JD Sports share price has fallen by 41%.
What is going on – and could this potentially present a long-term opportunity?
It’s made some investors nervous
The fall can be attributed to various factors. A series of profit warnings last year and this year certainly didn’t help things.
Part of the problem has been a difficult period for Nike. It is a key supplier for JD Sports and so when market sentiment towards the US megabrand’s poor, that often affects the JD Sports share price too.
JD’s like-for-like sales revenue in the first half showed a 2.5% year-on-year decline. A point of particular concern was sales dropping off in its home UK market. First half like-for-like sales were 3.3% lower than in the prior year period, but the second quarter showed a steeper decline of 6.1%.
That’s concerning, although the company pinned it on strong performance in the same quarter last year thanks to the Euros football tournament.
Here’s why I’m keeping the faith
But although first-half like-for-like sales fell, total sales grew. That reflects JD’s expansion in recent years, adding new shops through acquisitions and also an aggressive shop-opening programme.
While the like-for-like sales performance concerns me, I don’t think it is surprising in a market that’s struggling with weak consumer confidence. I see a risk that could worsen, as consumers rein in spending and potentially pose a threat to both sales and profits at JD.
However, the company seems in confident mood. It announced a new £100m share buyback last month and says it is on course to meet market expectations for the full year.
A potential bargain
Given its recent history of profit warnings, I’m taking that with a pinch of salt. A lot can change between now and the end of the year.
Still, those expectations are for profit before tax and adjusting items of £852m-£915m. That makes the company’s market capitalisation of £4.7bn look like a possible long-term bargain to me.
While the JD Sports share price has tumbled over the past year, it has rallied an impressive 47% since the start of April. Yet it still sells for pennies.
So could there be more to come? With its proven model, strong brand and large international footprint, I see the firm as a business to be reckoned with.
The share price has been volatile and that could continue, but I see JD Sports as potentially undervalued from a long-term perspective. I think the strong performance since April could be part of the share bouncing back, something I think may continue if it doesn’t disappoint investors again with unexpected bad news.
I plan to hang on to my shares for now and, if the price dips again, will consider buying more.
